With the signing into law of California Senate Bill SB 972, California amended Section 2782.8 of its Civil Code, thereby limiting the enforcement of indemnification clauses upon design professionals working for public agencies. Much positive hype and commentary has been written by some firms and organizations stating: “This is a significant legislative victory for design professionals in California.” These commentators seem to suggest that they believe the new law prevents clients from demanding design professionals provide a defense as part of its indemnification obligations until a finding has been made that the design professional was negligent. That, of course, would be an absurd result and it is not what the legislation accomplishes. You can’t defend someone after the battle is over. To defend someone means you must get into the litigation and put up a fight to prove that someone was not damaged as a result of your negligence.
The two California court decisions that have caused so much angst among design professionals are Crawford v. Weathershield and UDC v. CH2M Hill. These decisions hold that when a party agrees by contract to indemnify another, the indemnity obligation automatically includes a duty to defend, even if the agreement does not specifically say so. The courts noted, however, that all the indemnitee must do to avoid this duty to defend is expressly state in the contract that it will not defend the indemnitee. The court will honor the contract language that is clear and unambiguous.
The two decisions also explain that the duty to defend (unless expressly excluded from the indemnity clause) is triggered as soon as a claim is made against the indemnitee, and that duty is owed even if the indemnitor is not ultimately found to be liable for the actual damages claimed by the third party claim that was made against the indemnitee. In the case of CH2M Hill, the court expressly concluded that despite the fact that a jury found the engineer was not negligent and was not otherwise liable for damages, the engineer nevertheless owed its client a duty to defend.
The courts explained that the defense duty aspect of an indemnification agreement is virtually the same as the duty that an insurance carrier owes to its insured to provide a defense in addition to whatever indemnity obligations it may have. They are two separate and distinct duties as explained by the courts in these cases, and as explained in scores of cases around the country that have addressed the duty as it applies to insurance policies. Nobody would seriously argue that their insurance carrier did not have to defend them when a claim is first made but could instead await a final verdict on liability before deciding whether to defend. Why then are otherwise reasonable people arguing that the courts were wrong to require the indemnitors to provide their clients with a defense before the indemnification obligation was proved? I submit that argument is fundamentally flawed.
The amended statute reads in relevant part as follows:
“2782.8. (a) For all contracts, and amendments thereto, entered into on or after January 1, 2007, with a public agency for design professional services, all provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any such contract, and amendments thereto, that purport to indemnify, including the duty and the cost to defend, the public agency, are unenforceable, except for claims that arise out of, pertain to, or relate to the negligence, recklessness, or willful misconduct of the design professional….” (emphasis added).
Several important things to note about this statute include the following:
1) It only applies to contracts with public agencies. For firms working for private clients this statute does nothing.
2) There is a critical exception to the prohibition on enforcing the duty to defend. So long as a claim has been made and it alleges that there was design professional negligence, the client can require a duty to defend as part of the indemnification contractually agreed to by the design professional. It sometimes happens that a claim is made that does not allege negligence along with the rest of the kitchen sink such as breach of contract, breach of warranty, fraud, misrepresentation, tortious interference with contract and on and on. But that is the exception not the rule. Consequently in the vast majority of cases, since there will be an allegation of negligence, the statute really offers no protection for the design professional.
3) The statute only applies to “design professionals” which are defined in the statute to include ONLY the following four classes of “individuals” and “entities” offering these services. These are (1)” architect,” (2) “landscape architect,” (3) “professional engineer,” and (4) “professional land surveyor.” Many services of a professional nature, such as property condition assessments (PCAs), environmental site assessments (ESAs), LEED services, and many other services do not fall within the four categories defined as “design professionals.” In addition, many engineers that have engineering degrees and perform engineering services are not licensed as P.E.s. Are they excluded from the protection (limited as it may be) found under this statute?
The legislative history addressing the intent of the drafters of the amendment to the statute makes it clear that the legislation is not intended to prohibit indemnitees from being indemnified by design professionals when there has been an allegation of negligence. They did not intend that proof and a final determination of negligence was reached before the duty to defend would be triggered.
Opinions expressed by others concerning the amended statute support my conclusions. Consider, for example, an article written by the law firm of Gordon Rees, stating:
“The limitations on indemnity agreements between public agencies and design professionals, as set forth in SB 972, do not substantially alter the landscape of contractual indemnity in the construction law arena. The amendments fail to provide design professionals with any new protections in the wake of Crawford and UDC-Universal Development, L.P. which the California Supreme Court recently declined to review. An architect, professional engineer or professional land surveyor will still have a duty to indemnify a public agency in any action where it is alleged that the design professional’s negligence, willful misconduct or recklessness contributed to a claim against the public agency. So long as there is a valid public agency contract containing an indemnity provision, and so long as the public agency properly tenders the claim, the mandate under Crawford and UDC-Universal Development, L.P. interpreting that duty to include a present and immediate obligation to defend, even in the absence of a negligence finding, still applies.”
What should have been done with the statute and what can be done now in contracts?
Answer Number 1: Insert language in the indemnity provision expressly stating that there is no duty to defend.
In states other than California, when providing risk management contract advice to design professionals, I advise that the indemnity provision be drafted something like the following:
“Indemnification. Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant’s only obligation with regard to indemnification shall be to indemnify the Client, its officer, directors, and employees from and against those damages and costs (including reasonable attorneys fees and cost of defense) that the Client is determined to be legally obligated to pay as a result of a third party claim due to death or bodily injury to any person or the destruction or damage to any property, to the extent caused by the willful misconduct or negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement.”
No duty to defend would be found in this clause in most states since (a) it does not expressly include a duty to defend, (b) it does not apply to claims and allegations but instead only applies to “damages” and costs” after the client is “determined” liable. That is probably a clause a design professional could have in its standard form agreement and a client would agree to it. But a more typical indemnity clause might just read something more like the following clause from a recent contract I reviewed:
“Consultant shall indemnify and hold harmless the Owner for all losses, expense and liabilities resulting in damages, including injury or death of any person, including employees of either party, and loss of or damage to property, including property of the Owner, to the extent that damages result from the negligent acts, errors or omissions of the Consultant, its agents, employees, subcontractors or assigns.”
Again, this clause would be interpreted in most states to require only indemnification after the fact, and there would be no duty to defend since the clause does not expressly say there is a duty.
In California, however, the civil statute, as interpreted and applied by the courts, would find a duty to defend in both of the above quoted clauses because the clause does not expressly say that there will be no duty to defend. The answer to that problem seems pretty easy. Just add a sentence or even just a short phrase or parenthetical expressly stating that the design professional will not defend the indemnitee. Note that in the clause that follows, I take the original clause quoted above and add a short parenthetical that I hope will fix the problem.
“Indemnification. Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant’s only obligation with regard to indemnification shall be to indemnify and hold harmless (but not defend) the Client, its officer, directors, and employees from and against those damages and costs (including reasonable attorneys fees and cost of defense) that Client is legally obligated to pay as a result of a third party claim due to death or bodily injury to any person or the destruction or damage to any property, to the extent caused by the willful misconduct or negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement.” (emphasis added).
Answer 2: Take another try at amending the statute to add a sentence something like the following: “Unless a duty to defend is expressly stated to be included as part of a contractually agreed upon responsibility to indemnify a public agency, no such duty shall be implied, inferred or otherwise created.”
When I first read the proposed language for the statute I wondered why the proponents didn’t take this more straight forward, streamlined, and unambiguous approach. After all it gets to the point that we just want the contract to be interpreted as written and intended. If we don’t say we intend to defend the indemnitee, then a statute and a court should not create a duty where not intended by the contract.
The convoluted, and preposterous interpretation given to the SB972 amendment to the California statute by those who assert that it means a design professional is not required to defend its client unless and until found negligent is contrary to our more typical and respected argument that courts should enforce the clear meaning of contracts without playing games with the words or the policies to try to revise the outcome of the contract to fit the courts notion of fairness. If you want a fair and reasonable contract then negotiate one with clear and ambiguous terms that does not require a duty to defend. The court in Crawford v. Weathershield stated it would honor that contractual intent so long as it is expressly stated.
About the author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report.